Wall Street is currently basking in the success of American companies in managing the new economic environment.In coming weeks we will discover that a significant proportion of Australian major listed companies enjoyed similar success in the last six months.
But companies in both markets need to brace for further tests as the economies decline further.
US based PGIM manages more than $1 trillion in equity, fixed income, real estate and other investments.
Read Next President and chief executive, David Hunt, graphically explained to the Australian’s Strategic Business Forum in Melbourne what was ahead for the US and I have edited some of his key forecasts and given my interpretation of what they mean to Australia.
Hunt: “It is possible that the Fed could avoid a hard landing and try to gently edge into this, but the odds are against them.
“We have looked at every single tightening cycle since the Second World War.There are only three times when we’ve had rising inflation the way we have here, and every time it’s ended in a recession.
“So if you’re a betting man, you probably do have a recession here in the next 24 months.
Powell and the Fed are going to go after inflation, first and foremost.And if that means slowing the economy down into a recession, they will do it.But this will be a very unusual recession.The labour market is actually going to stay quite tight.
We will have only modest credit losses as we go through it, because most corporate balance sheets in the US are in pretty good shape.”
Comment: Australian inflation is not far behind the US and our Reserve Bank has a similar interest rate agenda to the US Federal Reserve.And we must follow them or our currency will be trashed, leading to exploding inflation.
But like the US we are likely to have a tight labour market and our companies are in good shape.The big difference between the US and Australia is that a big proportion of our consumers are over borrowed at flexible interest rates so will bear the full brunt of the anti-inflationary measures.
Our recession may be worse than the US.
Hunt on asset values: “In listed securities there turned out to be no place to hide.Pretty much everything went down and went down by more than people thought.The big question is, does that work on the reverse? Or actually, once we have had this correction, do the correlations begin to come more normalised again? I personally believe that we’ll just rise back up together.But it has been, the worst start to global markets in 50 years.”
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Sign up Comment: For Hunt to be right, inflation must be controlled so interest rates fall — boosting both bonds and shares.In this week’s Wall Street rally a different pattern emerged, with shares rising along with a fall in bond prices as bond yields rose.
It’s a warning sign.In Australian dollar terms our market has not fallen as far as the US.In US dollar terms our fall has been more severe.
Hunt on real estate values: “The real estate cycle can lag public markets often by several years.People decide that if they don’t have to sell either their home or their apartment complex, or even the office building, they don’t.But then the appraisers (valuers in Australia) don’t have any new transactions to look at.
So for a period of time, you kind of move sideways.And then as there are people that are forced to sell, there’s a new price level that’s hit.And then finally the appraisers will actually move down the prices.We will go through a bit of a real estate crisis, but it will be it will be behind everything else.And in terms of percentage declines in the US, we’re looking at real estate falls of between 10 and 20 per cent.”
Comment: The Hunt scenario applies to Australia.Parts of our residential market are falling faster then the US because of the massive Australian overborrowing in the past two years.But commercial and infrastructure assets are following the Hunt pattern.
However, if the sharemarket stays down — and particularly if it falls further — the value these assets will decline.That means that those big superannuation funds that are overinvested in non-listed assets have values that are very dangerous and recent performances maybe inflated.
Hunt: “Every individual bond and stock that we own has an ESG (Environmental, Social, and Governance) rating.That’s part of a natural fiduciary duty.Beyond the financial impact on an asset, are there things that as a society we want to emphasise: We want to put more money into affordable housing and we want to put more money into green energy.”
Comment: Global and Australian institutions have taken on agendas beyond gaining returns for stakeholders.In the years ahead this will be a debating issue.
Hunt: “Crypto had no legitimate role in a fiduciary account.For us an asset class needed to meet three tests.It needs to have an adequate regulatory oversight; it needs to have its own store of value beyond just what somebody will pay for it.
And it needs to have some stable correlation to other asset classes.
As currently structured crypto currencies do not meet these tests.”
Comment: Agree.
Robert Gottliebsen Business Columnist Follow Robert Melbourne Robert Gottliebsen has spent more than 50 years writing and commentating about business and investment in Australia.He has won the Walkley award and Australian Journalist of the Year award.He has a place in t…Read more @BGottliebsen Because you’re following Robert Gottliebsen, we think you might like more stories from this author.
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